Dubai: Nine months after cancelling its debut sale of Islamic bonds because yields were too high, Al Baraka Banking Group’s Turkish unit is back approaching investors as borrowing costs tumble to record lows.
Al Baraka Turk Katilim Bankasi AS will offer as much as $250 million (Dh917 million) of seven-year dollar-denominated sukuks this year, the group’s Chief Executive Officer Adnan Yousuf said by phone on August 27 from Alexandria, Egypt. The average sukuk yield globally has fallen 91 basis points this year to an all-time low of 3.09 per cent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The premium to own Islamic debt rather than US Treasuries has narrowed 81 basis points to 204.
Al Baraka Turk would be only the second borrower from Turkey to sell sukuk after Kuveyt Turk Katilim Bankasi AS, a unit of Kuwait Finance House. Parliament passed legislation in June allowing Recep Tayyip Erdogan’s government to sell its first Islamic bonds, setting a benchmark for the country. Demand for Sharia-compliant financing is rising as companies have arranged $747 million in syndicated murabaha facilities this year, 65 per cent more than the amount for all of 2011, data compiled by Bloomberg show.
“As a new sukuk coming out of Turkey, and as one of the first Turkish banks to penetrate the Islamic bond market, there will be interest in Al Baraka Turk’s sale,” Apostolos Bantis, a credit analyst at Commerzbank AG in London, said by phone on August 28. “Al Baraka is among the few Islamic banks in Turkey and that by itself should support their new sukuk sale.”
Rate too high
Al Baraka Turk pulled a $200 million offering of three-year sukuk in December because the rate was too high, Yousuf said at the time. The deal was priced at a yield of about 6.5 per cent, two people familiar with the matter said last year.
Al Baraka will need to “offer a very high rate to make this interesting,” Turki Al Hoshan, a fixed-income dealer at Arab National Bank in Riyadh, said by telephone on August 28. “I’m not interested in investing in Turkey because of the country’s exposure to the problems in Europe.”
The Turkish bank has a $346 million murabaha facility maturing on September 22, according to data compiled by Bloomberg. The bank is planning to raise between $400 million and $500 million through the facility this month, CEO Yousif said.
Al Baraka is offering to pay 200 basis points more than interbank benchmark rates for deals in dollars and euros, according to data compiled by Bloomberg. For a dollar facility, that’s equivalent to a rate of 2.42 per cent, based on the current three-month London interbank offered rate.
Rising costs
The yield spread on Turkish murabaha facilities over benchmark rates has climbed to an average 207 basis points this year, from 150 in 2011, data compiled by Bloomberg show.
Sukuk sales worldwide have jumped to $33.4 billion so far this year, almost double the $17.5 billion raised by this time last year, according to data compiled by Bloomberg.
Al Baraka is one of four lenders in Turkey that comply with Sharia law.
“It’s possible the bank is using this to have a presence” in the sukuk market, Can Demir, an equity analyst at Renaissance Capital, said in a telephone interview from Istanbul on August 29. “It may also help bring down its borrowing costs for syndicated facilities because it now has an alternative.”
Lira gains
The lira strengthened 0.5 per cent to 1.8179 against the dollar on August 31, trimming last month’s decline to 1.3 per cent. It weakened 0.2 per cent to 1.8207 at 12.31pm in Istanbul.
Yields on benchmark two-year lira-denominated bonds rose to 7.66 per cent, four basis points above the closing level on August 31.
The extra yield investors demand to own Turkey’s dollar-denominated sovereign bonds rather than US Treasuries rose one basis point to 229, JPMorgan Chase & Co’s EMBI Global index shows. The average spread for developing-nation debt fell one basis point to 318.
Credit-default swaps on Turkey, rated BB, the second-highest non-investment grade status at Standard & Poor’s, fell three basis points, or 0.03 percentage point, to 180, according to data compiled by Bloomberg. That compares with 165 for Russia, 151 for Poland and 152 for South Africa.
Junk status
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Banks were closed in London on Sunday for a holiday.
Al Baraka Turk is rated BB at S&P, the same as the sovereign and two steps below its parent Al Baraka Banking Group based in Bahrain. The Gulf state is showing signs of recovery after fallout from anti-government protests last year led to the slowest growth in 13 years.
The scarcity value of Al Baraka Turk’s sukuk might help keep its costs down, as will the fact that risk in Bahrain has declined since the last time the bank came to the market, Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd in Dubai, said by phone. Still, the Turkish bank “needs to change its pricing expectations,” he said.